Organisations do not always have the information they need to make accurate worker status decisions under IR35 requirements and it is too difficult for workers to challenge decisions they feel are incorrect, according to a group of MPs.
In its second report looking into the lessons from implementing IR35 reforms, the public accounts committee says HM Revenue & Customs (HMRC) needs to demonstrate that the off-payroll working rules “can operate fairly and effectively in the real world”, and urged it to investigate whether the “costs and unintended consequences” are proportionate to the additional tax revenue it has raised.
The report says: “Hiring organisations cannot always get all the information needed to accurately assess a worker’s status, and it is too difficult for workers to challenge incorrect determinations as there is no independent appeals process.
“A lack of good data and legislative provisions in cases of non-compliance has also meant that HMRC ends up taxing the same income twice. This is of particular concern in the public sector where – if workers or their personal service companies reclaim the taxes they already paid – the government could end up subsidising private sector contractors for all of their tax.”
The committee notes that many public sector bodies have experienced difficulties when recruiting contractors due to rising pay rates.
IR35 worker status decisions
“Some contractors report that, to avoid perceived risks of failing to comply, their clients are changing hiring practices, such as no longer engaging workers through personal service companies. HMRC is unconvinced by such evidence, but has not conducted its own research with contractors,” it says.
It says there are also problems with the guidance and Check Employment Status for Tax (CEST) tool that HMRC provides. Some questions within CEST were “difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself”.
It finds that:
- High levels of non-compliance with the rules in central government reflect “poor implementation by HMRC and other government bodies”. The Home Office, the Ministry of Justice and Defra are among the organisations that have been hit with fines;
- It’s too difficult for people to challenge incorrect IR35 worker status decisions. Workers can challenge the decision with hiring organisations, but there is no independent route of appeal;
- HMRC is not doing enough to understand the impact of the reforms on labour markets, with the report stating HMRC is “too dismissive where a significant minority of people and businesses report being adversely affected” and is not proactively looking to at whether any sectors have been affected disproportionately by the reforms.
Dame Meg Hillier, chair of the Public Accounts Committee, said: “While workers in the gig economy have challenged their work and tax status in the courts, there is no recourse for workers deemed subject to IR35 tax rules despite the confusion and non-compliance that persist even in central government itself.
“After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labour market.”
The report recommends that HMRC:
- Develops robust estimates of non-compliance for the public sector as a whole and uses this to identify areas where it can reduce the challenge of complying with the reforms, for example by improving its guidance and tools
- Ensures there is a fast and independent process for contractors to resolve disputes over IR35 worker status decisions
- Conducts and publishes research into the impacts of the IR35 reforms on contractors and labour markets, to check it is being applied as intended and not adversely affecting employment opportunities
- Identifies and works with sectors that have been particularly affected to understand the challenges, and establishes how to address them and make it easier to comply
- Reviews how the system is working and whether it can be made more efficient and effective.
Matt Fryer, head of legal services at Brookson Legal, said: “The PAC report confirms that the UK needs an effective tax framework in place to enable private and public sector bodies to access the flexible workforce – which is vital to operational delivery, agility and growth.
“We would hope that some of the issues raised by this and previous reports from the House of Lords and Matthew Taylor are addressed in the Warman review into the Future of Work.
“In the meantime, these findings remind us that organisations which are unable to navigate this complex system risk both non-compliance and the loss of talent to competitors who can offer more attractive and compliant contracts.”
Seb Maley, CEO at IR35 insurance provider Qdos, said: “This IR35 review is damning and highlights many of the government’s failures. Along with evidencing the staggering levels of non-compliance in the public sector following reform, it exposes the flaws of CEST, which frankly still isn’t fit for purpose despite being launched five years ago.
“The risk-averse approach taken by some businesses is also flagged. What the government refuses to acknowledge is that many organisations have stopped engaging contractors altogether due to IR35 reform. Given IR35 reform can be managed, this is a needless approach and one that sees businesses struggle to attract contractors, exacerbating the UK’s staff shortages.”
An HMRC spokesperson said: “These reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees, levelling the playing field for everybody else and bringing in the tax that is due under the law.
“We delivered an extensive programme of education and support before the reforms took effect and we have continued to adapt our approach to improve compliance with the rules and support organisations to get things right.”
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